Samsung halts Note 7 production after new fire scare: source

Samsung Electronics Co Ltd suspended production of its flagship Galaxy Note 7 smartphones, a source said on Monday, after reports of fires in replacement devices added to the tech giant's worst ever recall crisis.

Fires in phones that were meant to replace devices that had been recalled because of their propensity to explode would be a disaster for the world's largest smartphone maker, suggesting it has failed to fix a problem that has already hurt its brand and threatens to derail a recovery in its mobile business.

"If the Note 7 is allowed to continue it could lead to the single greatest act of brand self-destruction in the history of modern technology," said Eric Schiffer, brand strategy expert and chairman of Reputation Management Consultants.

"Samsung needs to take a giant write-down and cast the Note 7 to the engineering hall of shame next to the Ford Pinto."

In a regulatory filing, Samsung said it was "adjusting" shipments of Note 7s to allow for inspections and stronger quality control due to some devices catching fire.

It did not comment on the production halt or the cause of the fires, while the source - who declined to be identified because they were not authorized to speak to the media - did not explain whether specific problems had been identified or when production was halted.

Samsung told Reuters earlier on Monday it was investigating reports of "heat damage issues" and would take immediate action to fix any problems in line with measures approved by the U.S. Consumer Product Safety Commission.

It ordered new batteries from another supplier and started shipping replacements to customers just two weeks later. But similar problems arose with a replacement Note 7 on Oct. 5, which began smoking inside a Southwest Airline flight in the United States.

Samsung shares, which have rebounded after an initial sell-off on the recall, closed down 1.5 percent, compared with a 0.2 percent rise for the broader market.

"I think the cleanest thing to do is to give up on the Note 7," said HDC Asset Management fund manager Park Jung-hoon, whose fund owns Samsung shares.

"What's scary is that this is causing people to repeatedly doubt Samsung's fundamental capabilities, so it's important for Samsung to get past this issue quickly."

Samsung's recall crisis has coincided with pressure from one of the world's most aggressive hedge funds, Elliott Management, to split the company and pay out $27 billion in a special dividend.

A South Korean government agency said it was monitoring reports of the fires and warned that the recalled Note 7 devices should not be used or charged inside airplanes.

Mobile carriers also took action on Monday.

AT&T Inc, the No.2 U.S. wireless carrier, said it would stop issuing replacement Note 7s and would let customers with a recalled Note 7 exchange that device for another Samsung smartphone or other smartphone of their choice.

No.3 wireless carrier T-Mobile US Inc said it was temporarily halting sales of new Note 7s as well as exchanges while Samsung investigated "multiple reports of issues" with its flagship device.

T-Mobile offered customers who brought in their Note 7s a $25 credit on their phone bill.

Australia's largest carrier, Telstra Corp, said Samsung had paused supply of new Note 7s, while fellow Australian carriers Optus and Vodafone said they had stopped issuing new Note 7s.

South Korea's two largest mobile carriers, SK Telecom and KT Corp, said they were monitoring the situation.

Samsung Electronics Co Ltd will replace all Galaxy Note 7 smartphones equipped with fire-prone batteries and halt sales of the flagship product in 10 markets, a devastating blow for what had been a revival in the firm's mobile business.

Samsung Electronics Co Ltd's shares fell to their lowest level in nearly two months on Monday after the tech giant told customers to switch off and return their new Galaxy Note 7 smartphones due to fire-prone batteries.